1. Field of the Invention
The present invention(s) generally relate to foreign exchange risk management systems. More particularly, the invention(s) relate to systems and methods for hedging foreign exchange exposure.
2. Description of Related Art
Business entities that conduct business internationally and/or are associated with foreign entities generally have business dealings in multiple currencies. For example, it is not uncommon where transactions in a foreign country are conducted in a different currency than the functional currency of the entity or a different currency than the currency used for financial statements and reporting of the parent entity. As a result, fluctuation in foreign exchange rates may lead to gains or losses.
Business entities that have gains or losses due to business transactions conducted in a foreign currency often have “exposure” that varies with the value of the transaction. Exposure is the degree of risk involved with either actually holding account balances in foreign currencies or having a forecast of holding account balances in foreign currencies. For example, exchange rate exposure is the risk associated with uncertain exchange rates. Three types of risk are transaction exposure, remeasurement exposure, and economic exposure. Transaction exposure is the risk that the value of a transaction will change because of exchange rate movements between the date of the transaction and the date of the settlement. Remeasurement exposure is the risk that arises from the remeasurement of the non-functional assets and liabilities back into a balance sheet represented in functional currency. Economic exposure is the future exposure of a business that is engaged in selling or buying goods in foreign currency to the risks resulting from changes in exchange rates.
Many companies are either unaware of currency exposure or are unable effectively manage currency value fluctuation. Even companies that are aware of currency value fluctuation may encounter difficulties and inefficiencies in identifying and managing the risk.
To offset the impact of the exposure, business entities forecast the exposure and engage in hedging activities by entering into foreign exchange (FX) contracts that can be used to guarantee the value of a transaction in a specific currency up to a future date. Previous hedging activities, however, are often inaccurate and fail to identify and effectively manage the currency value fluctuation.